the Obama $10 per barrel oil tax

Last week, the Obama administration said its upcoming budget will contain a proposal for a $1o a barrel tax on oil. Its purpose would be to fund infrastructure, as well as to use price as a tool to redirect Americans toward other forms of energy.

Anything more than these bare bones is still a puzzle.

Clues:

–the adminstration says the tax would not be collected from oil producers at the wellhead, i.e., it isn’t a tax on crude oil

–nevertheless, the tax would be collected by oil companies

–the levy would not apply to oil products refined in the US and then exported

–it would apply to oil products refined abroad and imported, though.

Effect:

A barrel (42 gallons) of crude oil refined in the US ends up on average as 19 gallons of gasoline, 12 of diesel/heating oil and 10 of other stuff.

If passed on to end users completely and evenly by the as yet unspecified collectors, a $20 a barrel ta would mean a $.24 per gallon increase in the retail price of each product.

This would be a baby step along the road to lessening dependence on OPEC already traveled by every other country in the developed world in the 1970s. Better late than never, in my view.

My take:

We’ll hear more later this week, I guess. But it strikes me from what has been said so far that the proposal has been defined more by what Mr. Obama doesn’t want to do than by anything positive he intends to accomplish.

–I think collecting the $10 at the wellhead from producers would likely tip some shaky shale oil producers into bankruptcy and discourage others from doing any development. After all, in a world awash in extra crude oil being stored in bunkers and even on ships tethered off the shores of producing countries, how is any independent US producer going to be able to pass on any part of the $10 to its refinery customers?

The waning of US shale would also have the disastrous consequence of handing control of the crude oil market back to OPEC and Russia.

–adding $.25 to the federal tax on gasoline and diesel fuel, which I think would be the simplest and most economically sound alternative, would upset the US auto companies, who are now raking in money from selling gas-guzzling SUVs. Autos are a traditional Democratic constituency and a perennial problem-child industry that the government rescued from bankruptcy less than a decade ago. So a gas tax is likely off the table.

In addition, a Republican congressman already raised the gasoline tax issue last year. He got a lot of grief and no support from anyone on either side of the aisle.

–This leaves refiners and/or distributors is most likely to be the parties taxed. To me, this implies that the $10 cost would be shared among producers, refiners and end users according to who has the most market clout. 2015 results from refiners and distributors tell us that they have already been keeping a substantial portion of the benefits of lower crude oil prices for themselves, rather than passing them on to customers. My guess is that shrinking margins for refiners and middlemen would be the primary effect of the proposed new levy.

Also, if the past is any guide, the issue of tracking and differentiating between refined products for export and those for domestic use would be a regulatory/compliance–and a fertile field for fraud.

As we get more details, we’ll be able to decide whether the oil tax is something concrete or just wishful thinking.